General Services Department Janitorial Services Contract Performance .

Office of the City Controller Audit Division Verified that the services, service locations, and billed amounts reflected the current contractual agreements; Reviewed reported MWSBE contract participation for fiscal years 2014 and 2015; Requested McLemore and McLemore subcontractors weekly payroll submissions to the OBO for calendar years 2014 and 2015; Reviewed a sample of service requests from the Work Ticket Report; and Performed site visits to selected locations to make visual observations and verify contractor/subcontractors provided contracted services. AUDIT METHODOLOGY We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards and the International Standards for the Practice of Internal Auditing as promulgated by the Institute of Internal Auditors. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The scope of our work did not constitute an evaluation of the overall internal control structure of GSD. Management is responsible for establishing and maintaining a system of internal controls to ensure that City assets are safeguarded; financial activity is accurately reported and reliable; and management and employees are in compliance with laws, regulations, and policies and procedures. The objectives are to provide management with reasonable, but not absolute assurance that the controls are in place and effective. CONCLUSIONS AND SIGNIFICANT ISSUES We believe that we have obtained sufficient and appropriate evidence to adequately support the conclusions provided below as required by professional auditing standards. Each conclusion is aligned with the related Audit Objective for consistency and reference. For detailed findings, recommendations, management responses, comments and assessment of responses see the “Detailed Findings, Recommendations, Management Responses, and Assessment of Responses” section of this report. OBJECTIVE 1 – Determine contractor compliance with the key administrative terms and conditions of contract numbers 4600012301 and 4600012338 and any related contract amendments. CONCLUSION Based on the results of the procedures performed, the audit team noted that McLemore was generally compliant with administrative requirements of the contacts. Based on inquiries conducted during the audit and supporting documentation reviewed, we determined: McLemore maintained evidence of insurance coverage during the period under review and provided initial evidence of adherence to drug policy requirements. McLemore has evidence of subcontractor insurance coverage for the period under view but did not have evidence of subcontractor drug policy compliance; and Neither GSD nor SPD were aware of the status of McLemore’s compliance with administrative requirements (See Finding #1). 3

Office of the City Controller Audit Division OBJECTIVE 2 - Examine and assess internal controls related to the validation of contract and subcontract personnel assigned to staff City facilities. CONCLUSION . Based on the results of procedures performed, the audit team noted that McLemore and their subcontractors had adequate internal controls in place to validate personnel they have assigned to perform services at City facilities . 3 - Identify and document internal controls related to the contractor/vendor billing and payment process. OBJECTIVE CONCLUSION GSD had sufficient internal controls in place to process vendor billings. Specifically, there are procedures in place to verify that services and facilities billed are covered by the vendor contract, amounts billed reflect contractually approved rates, invoices are properly approved prior to payment, and that all valid invoices are submitted for payment. OBJECTIVE 4 - Ensure all payments due contractor/vendor personnel have been properly paid . CONCLUSION Upon review of the required weekly payroll submissions to the Mayor's Office of Business Opportunity, we determined that payroll information was not submitted by McLemore or the subcontractors in calendar years 2013 or 2014. Payroll submissions began as of January 2015. Based on the information submitted, MWSBE participation is just over 50% for both contracts. OBJECTIVE 5 - Observe fulfillment of required service obligations at selected locations. CONCLUSION During site visits to selected facilities, we observed several issues related to the fulfillment of the required service obligations. McLemore does have quality control procedures in place to address issues. While the audit team does not believe that one visit is sufficient to make a determination regarding service fulfillment, those observations in conjunction with inquiries of on-site City staff lead us to conclude that internal controls in place to monitor these activities are not consistently applied (See Finding #2). ACKNOWLEDGEMENT AND SIGNATURES The Audit Team would like to thank the management and staff of both GSD and McLemore for their cooperation, time, and effort throughout the course of the engagement. We would also like to recognize the management and staff of The Gee Group for the execution of detailed audit procedures that provided the evidence contained in this report. c2 Courtney E. City Auditor 4

Office of the City Controller Audit Division DETAILED FINDINGS, RECOMMENDATIONS, MANAGEMENT RESPONSES, AND ASSESSMENT OF RESPONSES FINDING #1 – REQUIRED ADMINISTRATIVE AND SAFETY REPORTING IS NOT ON FILE RISK RATING (IMPACT AND MAGNITUDE) MEDIUM BACKGROUND: The City of Houston (City) General Services Department (GSD) has awarded two (2) contracts for janitorial cleaning and associated services to McLemore Building Maintenance, Inc. (McLemore). Due to the nature of the contracted work, the contractor and subcontractors have access to multiple City facilities on a daily basis. Some of the facilities contain sensitive information or require personnel to employ specific safety steps. Language in each contract stipulates several administrative and safety compliance areas the contractor and subcontractors which must be met prior to contract commencement or for the duration of the contract term. Administrative and safety requirements often serve as controls to ensure financial risks or exposures are mitigated but are also in place to mitigate health and safety risks. Both GSD and the Strategic Procurement Division (SPD) within the Finance Department have monitoring roles to ensure these contract provisions are followed and operate effectively. Effectively monitoring the administrative and safety provisions allows the City to identify when contract provisions are not being followed and minimize potential financial exposure. McLemore, as the prime contractor should be able to produce documentation of compliance when requested. GSD and SPD should maintain copies of the administrative and safety related reporting as required by the contract. FINDING: Documents demonstrating contractor and subcontractor compliance with administrative and safety requirements were not contained in GSD or SPD files. The lack of documentation hinders the City’s ability to comprehensively monitor compliance. We requested documents supporting contractor and subcontractor compliance with several key contractual provisions related to administrative activities and safety to determine if those requirements had been met. Documents requested included those related to: 1) evidence of insurance coverage for McLemore and seven (7) subcontractors used during 2014, 2) documents on file with SPD to support adherence to Drug Abuse Detection and Deterrence Procedures for McLemore and all subcontractors, 3) evidence of employment eligibility verification (Form I9) for a sample of 41 subcontractors, and 4) Material Safety Data Sheet notebook including safety data sheets and other written reports of safety meetings. Evidence of insurance coverage for McLemore and all subcontractors was provided by McLemore however neither GSD nor SPD were able to find copies of the documents in their files. (See Exceptions Log #s 1 & 2) All applicable documentation required to support evidence of McLemore’s compliance Drug Abuse Detection and Deterrence Procedures at contract signing was supplied by McLemore however no subsequent information was provided. 5

Office of the City Controller Audit Division SPD did not have copies of those documents in their files. (See Exceptions Log #s 3 & 4) No evidence of subcontractor compliance with Drug Abuse Detection and Deterrence Procedures reporting was provided by McLemore or SPD. (See Exceptions Log #s 3 & 4) No Material Safety Data Sheet notebook is on file. McLemore does not have any Material Safety Data Sheets for the period since contract numbers 4600012301 and 4600012338 were awarded. We did find evidence that safety meetings are being held periodically and reviewed 4 reports. (See Exceptions Log #12) RECOMMENDATION: GSD should work with SPD to ensure the administrative reports currently required by contract are on file with the appropriate department. We also recommend that prior to making any changes to contractually required administrative or safety requirements GSD should work with the Legal Department and other advisory personnel to ensure any risks mitigated by those requirements are covered by other compensating controls. GENERAL SERVICES DEPARTMENT MANAGEMENT RESPONSE4: GSD has reviewed the administrative reporting requirements of the contract in which some has changed. A meeting will be set up with the legal department to review the contractual changes we think are required and we issue a contract change order to McLemore to update both City of Houston janitorial contracts managed by the general services department. RESPONSIBLE PARTY: General Services Department – Property Management Division and Finance Department Strategic Procurement Division. ESTIMATED DATE OF COMPLETION: March 1, 2016 ASSESSMENT OF RESPONSE: The Audit Division agrees with GSD’s commitment to meet with the Legal Department to review contractual changes. Any contractual changes made to administrative and safety compliance reporting should ensure areas of risk for the City are addressed with action items that are specific, measureable, and achievable in nature. Once changes are made the designated party (Department, Division, etc.) should monitor compliance with the revised contractual requirements. 4 GSD Management responses to each finding are included verbatim. 6

Office of the City Controller Audit Division FINDING #2 – MONITORING EFFECTIVENESS OF OPERATIONAL PERFORMANCE IS INCONSISTENT RISK RATING (IMPACT AND MAGNITUDE) MEDIUM BACKGROUND: McLemore Building Maintenance, Inc. (McLemore) has been contracted to perform janitorial and associated services for more than 120 City facilities. The contracts (contract numbers 4600012301 and 4600012338) detail specific scopes of work for the facilities included in each contract including the type and frequency of services to be provided to those facilities, pricing, supervision, quality control, invoicing requirements, minimum wage and personnel benefits, and weekly payroll submission requirements. These requirements form the foundation of controls related to the operational activities of the contractor and subcontractors and payment for services performed. Changes to the contract (change orders) must be done in accordance with language in the contract. Change orders can be operational or administrative in nature. GSD as well as those departments housed in the facilities covered by the contracts have roles to play to ensure services are being performed as intended. Personnel in each facility have access to a work ticket system maintained by McLemore. Through this system, departments can request attention to specific issues. Department contacts may also call McLemore to request service. Phone requests should be entered into the system by McLemore. Effectively monitoring operational activities increases the likelihood that services are performed as contractually required, invoicing is accurate, and payments to contractor personnel comply with wages stipulated in the contracts. FINDING: GSD does not have formal procedures in place to consistently monitor services performed under the contract and does not receive documentation from procedures that are occurring. The audit team requested documentary evidence of weekly payroll submissions, invoicing, supervision, and quality control activities occurring during calendar year 2014. Site visits were performed for visual evidence of contractor work performance. Contract requirements to hold monthly inspections, complete inspection logs, and formal monthly site tours have largely been replaced by use of McLemore’s Work Ticket system. Meetings are held on an “as needed” basis however the meetings are not formally documented. (See Exception Log #s 7, 8, 9, & 10) Weekly labor logs required by contract are no longer kept in favor of using the contractor’s electronic time and attendance system. Information from the electronic system is not provided to GSD. (See Exception Log #s 5 & 6) Neither McLemore nor the subcontractors were aware during calendar year 2014 that weekly payroll submissions were required and did not submit them. Submissions began in calendar year 2015 after notification by the Office of Business Opportunity (OBO). Payroll submissions for 2015 were on file, had been reviewed by OBO, and were determined to be in compliance with minimum wage requirements. (See Exception Log # 5) 7

Office of the City Controller Audit Division Several exceptions were noted during site visits to selected facilities. The conditions noted in the Exception Log were present at the time of the site visit without consideration of the cleaning schedule. The observations do not necessarily represent the constant state of the facility, however cumulatively they indicate the need for more consistent monitoring. (See Exception Log #s, 11, 13 through 32, & 34). A work order for power washing at one facility was requested and the contractor performed the request prior to the establishment of an executed PO contrary to GSD’s internal expenditure control policy as detailed in Exhibit B, Section A. Subsection 4.2.6.2. (See Exception Log # 33) RECOMMENDATION: We recommend GSD consider the following items to enhance their ability to monitor contract performance: A. Work with City and McLemore personnel to develop effective periodic reports to strengthen GSD’s ability to monitor contractor performance at City facilities. GENERAL SERVICES MANAGEMENT RESPONSE GSD will work with McLemore to institute a more effective contract monitoring tool. One option that we are currently using on our facility and operation contract is a performance scorecard which can be customized for each location on the janitorial contract. Further discuss with McLemore and GSD will be required to implement this contractual change. Target Date - March 2016 B. Work with the Legal Department to ensure City personnel, contractors and subcontractors are aware of any contractual requirement to submit weekly payroll reports to the Office of Business Opportunity. GENERAL SERVICES MANAGEMENT RESPONSE GSD will work with McLemore, COH legal department and Office Business Opportunity to ensure that the weekly subcontractor payroll is SUBMITTED AS required per the contract. GSD will request copies on this report so we can track the compliance and have records on file. Target Date – February 2016 C. Disseminate documentation regarding GSD’s internal expenditure control policy to ensure proper procurement procedures are followed. GENERAL SERVICES MANAGEMENT RESPONSE The Property Management Division of GSD is currently ongoing a reorganization. As part of this reorganization our internal expenditure controls are being reviewed and updated to make sure they are applicable in our current environment required to manage our COH facilities. Once the reorganization is finalized and approved; all internal external expenditure controls will be disseminated throughout the division – Target Date: May 2016. 8

Office of the City Controller Audit Division D. Work with the Legal Department to revise contract language that is obsolete as a result of technology enhancements or process changes made as a result of security requirements or process improvements. GENERAL SERVICES MANAGEMENT RESPONSE GSD will set up meeting with the Legal Department to review and make changes to our Janitorial contracts to reflect our current contractual needs. Target Date: May 2016. RESPONSIBLE PARTY: GSD – working with Legal Department and Office of Business Opportunity. ESTIMATED DATE OF COMPLETION: SEE ABOVE ASSESSMENT OF RESPONSE: A. Management’s response addresses the issue as identified in our audit. The Audit Division agrees with GSD’s commitment to work with McLemore to strengthen performance monitoring capability. Properly designed, the process will encourage increased attention to detail for both the contractor and the city staff. B. We agree that periodic monitoring of subcontractor payroll submissions is beneficial to ensure that contractual requirements are fulfilled as intended. This step further ensures that the Department is managing contract performance. Management’s response addresses the issue as identified in our audit. C. Management’s response addresses the issue identified during our audit procedures. Reviewing processes is well-timed given efforts to reorganize other City processes and/or procedures that impact GSD’s procurement process. D. The Audit Division agrees with GSD’s commitment to meet with the Legal Department to review contractual changes. Any contractual changes made should ensure areas of risk for the City as well as performance needs are addressed with action items that are specific, measureable, relevant, and achievable in nature. Management’s response addresses the issues identified in our audit. 9

Office of the City Controller Audit Division EXHIBIT 1 10

CITY OF HOUSTON INTERNAL AUDIT DEPARTMENT McLemore Building Maintenance, Inc. Contracts 4600012301 and 4600012338 Audit Period - Calendar Year 2014 DETAIL EXCEPTIONS LOG Internal Control Deficiency Category Definitions An internal control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect error conditions or misstatements on a timely basis. Design - A deficiency in design exists when (a) a control necessary to meet the control objective is missing or (b) an existing control is not properly designed so that even if the control operates as designed, the control objective is not always met. Operation - A deficiency in operation exists when a properly designed control does not operate as designed, or when the person performing the control does not possess the necessary authority or qualifications to perform the control effectively. FINDINGS Inquiry, Observation, Inspection, Item II. Duties of Contractor: Insurance: 4.0: Contractor's Performance 11.0 Name Michael Bryant Contract # 4600012301 & 4600012338 Exception # 1 Limited Re-performance Verify the contractor (McLemore) and the sub-contractors have a current insurance certificate providing coverage in the amounts specified in the contract. Michael Bryant 4600012301 & 4600012338 2 Backgr

Exhibit H by service type, facility, unit of measure (UOM), and contract year. Examples of contract pricing are shown in Table 12 below: Table 1 Janitorial UOM Year 1 Year 2 Year 3 Year 4 Year 5 Wheeler Fleet Shop Monthly 174.89 179.48 184.07 188.66 203.99 Porter Services UOM Year 1 Year 2 Year 3 Year 4 Year 5